Finance minister P Chidambaram has also mandated the empowered committee of state finance ministers to ready a draft of the GST law.

NEW DELHI: The forthcoming union budget is likely to provide about Rs 12,000 crore to compensate states for losses they have incurred on reduction in central sales tax (CST) rate, sending a clear signal to states that centre will address their concerns as it rushes to implement the goods and services tax (GST).

Finance minister P Chidambaram has also mandated the empowered committee of state finance ministers to ready a draft of the GST law.

Chidambaram hopes to implement the ambitious reform of the indirect tax regime by December this calendar.

"Union finance minister has indicated that he will make a provision towards CST compensation in the budget...," Bihar deputy chief minister and chairman of the empowered committee of state finance ministers Sushil Modi told reporters after meeting of the panel with Chidambaram.

He however did not specify the quantum of provision in the budget. Under a compromise solution reached earlier, the states will together receive Rs 34,000 crore as compensation for the reduction in CST for three years beginning 2010-11.

They have already received Rs 6703 crore of the Rs 19,000 crore claimed for the 2010-11 and the balance has to be provided.

A panel set up by Chidambaram comprising state and central government officials has suggested full 100 per cent compensation for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13.

The meeting had been called to take a stock ofthe progress achieved on the contentious issues that were holding up GST to enable Chidambaram to make a make a statement in the forthcoming budget on the contours of the new tax Chidambaram is keen to unveil some steps in indirect taxes structure in the budget and also give a time frame on its roll out.

The union finance minister had in his overseas roadshows said the GST legislation could be brought in by December this year. Modi said Chidambaram has also assured that if GST implementation takes a longer time then he will revisit the CST compensation issue again or look at reverting to original CST rate of 4 per cent. The centre collects CST, levied on inter-state transaction, and distributes it among states.

The centre and states had agreed to phase out CST from April 2007 over a period of three years. CST rate was first cut to and, consequently, the CST rate was reduced to 3 per cent from 4 per cent and then to 2 per cent.

The reduction plan was put on hold after the financial crisis of 2008. Modi said all states had backed the need for a constitutional amendment to implement GST.